Historically, record-high inflation especially in western economics has led policymakers to hike the key interest rate abruptly within a short span of time.
The Reserve Bank of India (RBI) also hiked the repo rate twice in the last two months by 90 bps. The selloff by the foreign institutional investors (FIIs) has led to domestic benchmarks falling over -17% from their highs, while select sectors were down by more than -20% on a YTD basis.
This chain of events usually leads to a decision that may not necessarily hold true in the portfolio, and it should be avoided by investors.
1. Selling Stocks in Panic:
This is a common trend in the falling market as emotions override practical judgment. It is wrong to panic in a tough market as long as your stock holdings are backed by strong fundamentals.
Further, panic selling is ideally the case of selling at a lower price. This increases your losses in the portfolio by selling at low.
2. Building on the Averaging Concept:
It is usually the tendency to buy the stocks on every fall to average the cost of buying. But doing this without knowing the fundamental strength of the stock(s) will lead you to more losses in the portfolio.
It is always better to avoid catching the falling knives, and take a pause to evaluate the reasons for such events.
3. Trying to Predict the Bottom:
The market is the ultimate supreme and it will take its own course of action till the conditions are met. So, it is equally imperative to make the investment on the basis of prediction without having a firm basis to support the decision.
Investing a large sum amount by assuming the bottom can have a huge dent in the portfolio, which will also shake the confidence. This further leads to ad hoc sentiment-based decisions.
4. Being Rigid in Decision-Making:
It is imperative for investors to be flexible with the market in order to survive and thrive on a long-term basis. Keeping a rigid view despite the market going against you will have server consequences.
As an investor, we should acknowledge/accept the prevailing sentiment in the market. And realign the strategy which is best for the portfolio in the prevailing situation.
5. Buying Everything and Anything:
Investors should always stick with their initial financial goals/planning without altering on the basis of the current market situation.
It is often tempting to buy when the prices are in single/double-digit and generally overlook the fundamental attributes. Buying randomly leads to the unnecessary addition of stocks in the portfolio with over-diversification, making it difficult to track.
It is a natural trend of the market to go through a tough phase once a while before bouncing back to form newer heights. One should approach logically in managing the portfolio and avoid making kneejerk reactions.